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TMI Blog2020 (9) TMI 455X X X X Extracts X X X X X X X X Extracts X X X X ..... in support for the earlier AY 2006-07 which was confirmed by the Tribunal in assessee s own case [ 2019 (4) TMI 1900 - ITAT DELHI] . Therefore, the suo motu disallowance at 10% is reasonable and cannot be faulted with. We, therefore, set aside the findings of the CIT(A) and direct the Assessing Officer to accept the suo motu disallowance. Hence, the appeal filed by the assessee is allowed. Penalty u/s 271(1)(c) - HELD THAT:- Since the same is based on the quantum appeal and there is no finding given by the AO that the assessee furnished inaccurate particulars of income or concealed the particulars of income, the penalty does not survive as per the provisions of Section 271(1)(c) of the Income Tax Act, 1961. Hence, appeal filed by the assessee is allowed. Addition u/s 43A - foreign currency loans in respect of which foreign exchange gains or losses - for the purpose of investing in shares which were capital assets in the hand of the company in the relevant years, when the loan were raised - HELD THAT:- It is pertinent to note that the Revenue has not brought on record that any capital assets were acquired from a country outside India during the relevant assessment year. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce by not considering that some portion out of the total Administrative, Personnel and Financial Expenses would also have been incurred for other activities viz. financing on which the appellant has earned an interest income of ₹ 53.09 Crs. 2. That on facts and in law the Ld.CIT(A) has erred in upholding the application of the provisions of Rule 8D(2) of the Income Tax Rules, 1962 by the Assessing Officer, inserted by IT (Fifth Amdt.) Rules 2008, w.e.f. 24.03.2008 in the case of the appellant for the Assessment Year 2007-08. ITA No. 4287/Del/2010 (Revenue s appeal) (A.Y 2007-08) 1. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the additional disallowance of ₹ 23,08,14,127/- made by the AO u/s 14A of the Act. 2. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate the fact that sub-section (2) (3) of section 14A were inserted by the Finance Act, 2006, w.e.f. 1.4.2007 and provide for the determination of the amount of expenditure incurred by the assessee in relation to such income which does not form part of the total income, by the AO and he has furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt of Delhi in the case of Maxopp Investment Ltd. vs. CIT, New Delhi - ITA No.687/2009 {dated 18.11.11) and Godrej Boyce Mfg. Co. Ltd. vs. DCIT Anr (2010) 328 ITR 81. 1.3 That on facts and in law, the Ld.CIT{A) has erred in not appreciating that the appellant had suo moto made disallowance of expenses u/s 14A on the same basis which stood accepted in the earlier years assessments u/s 143(3) hence levy of penalty on this account is not justifiable. 1.4 That on facts and in law, the Ld.CIT(A) has erred in not appreciating that under similar set of facts and circumstances, in the Assessment Year 2006- 07, the Ld.AO did not even initiate the penalty proceedings u/s 271(1)(c) despite the fact that Rule 80 was applied for the purpose of determination of disallowance u/s 14A in the Assessment Order for the Assessment Year 2006-07. 1.5. That on facts and in .Jaw, the Ld.CIT(A) erred in holding assuming that the appellant has accepted the disallowance @ 0.5% of the average value of investments in the Assessment Year 2006-07, whereas the appellant has filed an appeal before the Hon ble ITAT, Delhi which is subject::matter of record available with the department. Thus, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - ₹ 65,17,34,199 - Out of Financial Expenses - ₹ 1,95,26,109 - Out of Personnel Administrative Expenses - ₹ 35,89,914 Total - ₹ 67,48,50,222 For explaining the basis and manner of computation of the above disallowance of interest before the Assessing Officer, the same was submitted by the assessee (along with relevant workings) that at the beginning of the previous year relevant to Asstt. Year 2005-06 i.e. on 01.04.2004, the assessee held shares of the aggregate value of ₹ 3,81,94,91,358/-. The corresponding position of share capital and reserves and surplus on the said date was as under: - Share capital - ₹ 54,75,50,000 - Reserves and surplus - ₹ 2,93,52,91,325 Total - ₹ 3,48,28,41,325 The Ld. AR further submitted that investments in years earlier to A.Y. 2005-06 were initially financed out of share capital and reserves and surplus and the balance investments were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to A.Y. 2005-06, virtually, no borrowed funds were used for investment in shares. The CIT(A) held that in respect of borrowings made during A.Y. 2005-06 for investments in shares, the assessee has correctly computed the disallowance on account of interest in relation to earning dividend income which does not form part of total income. In A.Y. 2006-07 adopting similar methodology, the disallowance u/s 14A for interest cost was computed by the assessee and was suo moto added back in the return of income. This was also accepted by the Assessing Officer, however it was alleged by him that the capital and reserves of assessee cannot be held attributable only to investments made in share. Attributing (on proportionate basis) part of capital and reserves to other business assets i.e. stock in trade, fixed assets, cash and bank, loans and advances, balance was held attributable to investments in shares. The Ld. AR pointed out that even after alleging as such the Assessing Officer computed disallowance of interest cost u/s 14A on product basis, taking into consideration the date on which investment was made, the amount invested and the period for which borrowed funds were utilized (i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .12.2009 and 30.12.2009. These submissions were filed before the Assessing Officer against a specific query raised by him vide order sheet entry dated 24.12.2009 during the course of assessment. While computing disallowance under Rule 8D sub rule (2) clause (ii) the Assessing Officer incorrectly computed Total Interest Cost , Average Value of Investments and Average Value of Total Assets . A petition u/s 154 dated 05.01.2010 was also filed in this regard before Assessing Officer . 6. As regards basis of disallowance of expenses, the Ld. AR submitted that the basis and manner of computation (along with working) was submitted by the assessee along with submissions dated 27.11.2009. The Ld. AR submitted that the assessee had to incur substantial administrative and personnel cost in the activity of granting loans and advances etc. due to the administrative work/efforts required as stated in the submissions dated 27.11.2009. The Ld. AR also submitted that the said cost was marginal in respect of its investment activity as the assessee did not have to incur any cost on realization of dividend income. 7. The Ld. DR submitted that Section 14A of Income Tax Act, 1961 was inserted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars and the legislative intent is to apply the basic principle of taxation, i.e. that it is only the net income- taxable or non-taxable, i.e. net of all expenditure incurred for earning the same, that could be subject to tax or, as the case may be, exempt from tax. The later Circular, which is in consonance with Memorandum explaining the provisions of Finance Bill, 2001 (introducing Section 14A) as well as the Notes to the clauses presented along with the said Bill, has been noted with approval by the Hon'ble Supreme Court in CIT(A) Vs. Walfort Share Stock Brokers (P) Ltd.[2010] 192 Taxman 211/326 ITR (S.C). The issue considered in perspective, is not if the income not forming the part of the total income (the tax-exempt income) is earned or not but if expenditure relatable to such income has been incurred. If such expenditure stands incurred, Section 14 A (1) becomes applicable. The decision by the Apex Court in the case of CIT(A) Vs. Walfort Share 86 Stock Brokers (P) Ltd (supra) stands followed in Godrej 8 Boyce Mfg. Co. Ltd Vs. Dy. CIT(A) [2017] 81 taxmann. Com 111 (S.C) where the Hon'ble Supreme Court while considering whether deduction of expenditure incurred in ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer as well by the CIT(A). The assessee has given in its reply dated 23/12/2009, the details as to why the disallowance u/s 14A shall not be computed under Rule 8D of Income Tax Rules. Thus, the extract of the same are as follows:- i) The reserves and surplus of the assessee have been on account of dividend income as well as profit on sale of shares held as investments. The position of Investments/Reserves/Capital etc. as on 1st April, 2004 was as under: Investments as on 1/4/2004 Capital as on 1/4/2004 Reserves as on 1/4/2004 Dividend Recd from 1/4/99 to 31/3/2004 Profit on Sale of Investments from 1/4/99 to 31/3/2004 Total of Dividend and Profit on sale of Investments 381.95 54.76 293.35 172.73 258.45 431.18 In view of the fact that Dividend Income and Profit on sale of Investments aggregating to ₹ 431.18 Crs. were more than investments i.e. ₹ 381.95 Crs., the investments were not made out of borrowings and hence t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e made /disposed-off (As per Annexure-III) Therefore, it is humbly requested that no further disallowance of interest is called for on this account. Thus, the disallowance was computed at ₹ 67,48,50,222/-. The Assessing Officer has computed the disallowance as per Rule 8D of the Income Tax Rules which is not applicable for the year under consideration as the present Assessment Year is 2007-08. It is pertinent to note that the Assessing Officer has also not given the satisfaction as to how the working given by the assessee is not plausible. The assessee has made disallowance at 10% which was in support for the earlier Assessment Year 2006-07 which was confirmed by the Tribunal in assessee s own case being ITA No. 1805/Del/2009 order dated 3/4/2019. Therefore, the suo motu disallowance at 10% is reasonable and cannot be faulted with. We, therefore, set aside the findings of the CIT(A) and direct the Assessing Officer to accept the suo motu disallowance of ₹ 67,48,50,222/-. Hence, the appeal filed by the assessee is allowed. 10. In result, the appeal of the assessee being ITA No. 3965/DEL/2010 is allowed. 11. As regards the penalty appeal filed by the assessee, ..... 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